- The Cleansing, Grounds Maintenance, Catering and Cleaning services should no

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1 Report Corporate Policy Committee 2 March 21 3 REVIEW OF TRADING ACCOUNTS 1. Reason for Report 1.1 This report provides details of the recent review of the Council s trading accounts and asks Members to agree the removal of specified services from the trading account regime. 1.2 Beyond the changes recommended in this report, it is recognised that further changes to budget management arrangements are likely to be appropriate to support the work being progressed as part of the development of the Council s Strategic Commissioning and Delivery Framework referred to in the preceding report on this agenda. 2. Report Summary 2.1 The Council currently maintains trading accounts for a range of Services and in some cases this has led to confusion regarding accountability for budget management and control. A review of the Council s existing trading accounts has been undertaken and the main findings of this review are:- - The only Statutory Trading Account that the Council should continue to maintain is for the Roads Service; and - The Cleansing, Grounds Maintenance, Catering and Cleaning services should no longer be maintained under the Statutory Trading Accounts regime. The Cleansing and Grounds Maintenance Services will now be managed on a direct budget basis (ie. traditional budgeting) while Voluntary Trading Accounts will be maintained, at least in the immediate term, for the Building Cleaning and Catering Services. 2.2 The report, and the supporting appendices, provide an explanation of the findings of the trading accounts review and the suggested changes. The report also considers the future financial prospects of DGFirst and indicates that it is fully anticipated that trading services (including those services being removed from the trading accounts regime) will return to overall profitability/surplus from the upcoming financial year (21111). 3. Recommendations Members are asked to: 3.1 note the results of the trading accounts review as outlined at Section 1 of this report; 3.2 agree that the Cleansing, Grounds Maintenance, Catering and Building Cleaning services will no longer be maintained under the Statutory Trading Accounts regime; and 17

2 Report Corporate Policy Committee 2 March note that further revisions to service and budget management arrangements will be assessed as part of the remit of the working group being set up to implement the Strategic Commissioning and Delivery Framework referred to in the preceding report on this agenda. 4. Plan Links and Contribution The review of trading accounts has been undertaken to support the development of the Strategic Commissioning and Delivery Framework which in turn supports a number of the key objectives reflected in the Council s Corporate Plan. 5. ResourcesNalue for Money Assessment 5.1 One of the main concerns associated with the operation of the Council s trading services has related to the material overall deficits returned by these services in recent years. Deficits in the Street CleansingNVaste Collection and the Property Maintenance services have been the main contributors to this position. 5.2 In the current financial year a more modest amount of f251 k has been contributed from Balances to address the Cleansing deficit (partially offset through a projected surplus against Grounds Maintenance). It is not anticipated that further material amounts will be required to address trading deficits in the current financial year. 5.3 As a result of a number of measures taken including the Waste Review, the full savings from which will be generated from 21/11 following the removal of the blue box recycling service, and work done to rationalise the Property Maintenance Service, as reported to the Resources Committee, it is fully anticipated that trading services will return to overall profitability/surplus from the upcoming financial year (21/11). 5.4 It is important to recognise that DGFirst has responsibility for the financial performance of their services whether or not they are provided through a trading account. Where services are provided through a trading account it is the responsibility of DGFirst to ensure that charges, to both internal and external customers, are set at a level which ensures the avoidance of trading account deficits. It is anticipated that trading service charges will be subject to revision as a result of the introduction of Single Status. 6. Risk Assessment 6.1 The financial performance of trading services is more volatile than budgeted services due mainly to variations in costs, market conditions and income associated with differing levels of trading. This has resulted in variations between projected and actual trading results although the projection of trading performance has improved in recent years and the extent of volatility in trading results has been reduced. 6.2 Perhaps the main risk currently facing the Council s trading services relates to the impact of Single Status. Single Status changes will add to the costs of a number of services (including Roads and ArchitectdEngineering Services) and this will have an impact on the competitiveness and profitability of these services. DGFirst are currently reviewing a range of measures to attempt to address these concerns and will bring forward a further report to Members on the findings of this review. 2 18

3 Report Corporate Policy Committee 2 March Authorities and Legal Implications The regulations requiring councils to maintain and publish information on statutory trading accounts for significant trading operations are reflected in the Local Government in Scotland Act 23. This Act repealed the previous legislation governing Compulsory Competitive Tendering. 8. Consultations The Corporate Management Team and senior management within DGFirst have been consulted as part of the preparation of this report and are in agreement with its terms. 9. Background 9.1 The Local Government in Scotland Act 23 requires councils to maintain and publish information on statutory trading accounts for significant trading operations. The criteria under which statutory trading accounts were/are assessed is outlined at Appendix I to this report. Under these criteria the Council had, up until 28/9, the following 4 Statutory Trading Accounts:- Catering & Cleaning Cleansing & Grounds Maintenance Property Maintenance Roads Maintenance 9.2 As a result of a reduction in size/turnover following the loss of the DGHP contract, the Property Maintenance Service was removed from the Statutory Trading Account regime in financial year 28/9. This report proposes the removal of both the Catering & Cleaning and the Cleansing & Grounds Maintenance services from this regime and this is discussed at Section 1 of this report. 9.3 In addition to Statutory Trading Accounts, the Council has also maintained a range of Voluntary Trading Accounts. These Voluntary Trading Accounts have generally been maintained for Services which have a degree of external trading and/or recharge costs to a range of customers. These Voluntary Trading Accounts are listed and explained at Appendix 2 to this report. 9.4 There have been a number of recurring concerns associated with the operation of trading accounts over recent years. It is recognised that in some cases the operation of trading accounts has led to a blurring of accountabilityhesponsibility and these concerns have increased in recent years as a result of recurring trading account deficits. These concerns, and changing requirements in relation to the maintenance of statutory trading accounts, make it appropriate to undertake an overall review of the maintenance of trading accounts within the Council. 1. Review of Trading Accounts 1.1 The maintenance of trading accounts is designed to support the demonstration of best value where services are:- provided in a competitive environment and provided on a basis other than a straightfoward recharge of cost. 19

4 Report Corporate Policy Committee 2 March However, it is essential that trading accounts are maintained only where it is appropriate and where it can be demonstrated that the above criteria are met. There have been concerns that in some cases the operation of trading accounts has led to a blurring of accountability/responsibility for service and financial performance. 1.3 A full review of the nature of the Council s existing trading services, and the need to continue to maintain these services under the trading account regime, has been undertaken. The results of this review are reflected at Appendices 2 and 3 to this report. 1.4 The changes resulting from this review are outlined at Appendix 2 and the key issues are as follows:- The only Statutory Trading Account that the Council should maintain will now be for the Roads Service The Cleansing, Grounds Maintenance, Catering and Building Cleaning services should no longer be maintained under the Statutory Trading Accounts regime. The Cleansing and Grounds Maintenance Services will now be managed on a direct budget basis (ie. traditional budgeting) while Voluntary Trading Accounts will be maintained for the Building Cleaning and Catering Services. 1.5 Explanations for these suggested changes are provided at Appendix 2 to this report. It is important to recognise that further revisions to service and budget management arrangements, including a potential further reduction in the number of voluntary trading accounts being maintained, will be assessed as part of the remit of the working group being set up to implement the Strategic Commissioning and Delivery Framework referred to in the preceding report on this agenda. 1.6 Under the Strategic Commissioning and Delivery Model it is considered unlikely that it will be appropriate for a single Service/Department to operate a trading account (and act as the deliverer) for a service for which they also hold the budget (and act as the commissioner). The transfer of the Cleansing and Grounds Maintenance activities to a direct budget approach addresses this concern for these services. The only significant area where this issue will continue to arise relates to the Roads Service and this will be subject to further review as part of the remit of the working group referred to at para 1.5 above. 11. Financial Implications and Projected Financial Performance Given the financial difficulties encountered by trading services in recent years it is important that this review takes into account the projected financial performance of both the former and the continuing trading services. Current Financial Year 11.2 In recognition of the initial findings of this review of trading services, the Finance Sub Committee at its meeting of 12 November 29, noted the requirement for a one-off contribution from General Fund Balances to address the following:- 4 2

5 Report Corporate Policy Committee 2 March 21 3 Cleansing and Strategic Waste Fund Grounds Maintenance Supporting People Total 911 Projected Deficit/( S u rpl us) f 477 k (E 21 k) (f25k) f 251 k 11.3 A report presented to the February meeting of the Resources Committee indicated a projected deficit of f 148k against the remaining trading services due mainly to pressures on the Property Maintenance and School Catering Units which is only being partly offset through a surplus on the Roads account. This overall position has been gradually improving over the course of the financial year and the DGFirst Management Team are currently progressing further measures aimed at ensuring that this remaining deficit is addressed prior to the 2911 year-end. Future Prospects - From Within the remaining trading services it is projected that the Roads Unit will continue to return surpluses in the region of f3k per annum. However, as reflected at Appendix 3, it is considered appropriate, specifically for corporate budgeting purposes, to make some allowance for potential delays in the achievement of efficiencies in tackling difficulties in the Property Maintenance, Vehicle Maintenance and Catering Services. A small overall surplus is therefore projected against trading services and this will be carefully monitored on an ongoing basis In respect of the Services transferring out of the trading services regime, it is anticipated that there will continue to be a surplus of around f2k on the Grounds Maintenance Service. In recognition of the projected surplus against the Cleansing budget, as a result of the removal of the blue box scheme and the review of glass recyclate operations, Members agreed a saving of f22k as part of the 21/11 budget setting process. As reflected at Appendix 3, an overall underspend of f2k against the services transferring to the General Fund is therefore projected for financial year 21 /11. This projection will be carefully monitored throughout the financial year with a view to returning this amount to General Fund Balances at the yea r-end It is therefore fully anticipated that, with the delivery of the savings and efficiencies already considered and agreed by Members, both continuing and former trading services will return to overall profitability from the new financial year. Trading results and performance against budget will require to be carefully managed and monitored to ensure that these improvements are secured. Opportunities to return amounts to balances and to support future savings requirements (perhaps through reinvestment of surpluses) will also be sought and will be reported to Members as appropriate. 3 21

6 Report Corporate Policy Committee 2 March 21 Paul Garrett Operations Manager Accountancy Carruthers House English Street DUMFRIES DG1 2HP Date of Report: 8 February 21 File Ref: tradingaccs-corppol2feb21 Gordon Lawson Director of Support Services Community & Support Services Carruthers House English Street Dumfries DG1 2HP Appendix I - Guidance on Statutory Trading Accounts Appendix 2 - Summary of Classification of Former Trading Services and Projected Financial Performance Appendix 3 - Projected Financial Performance of Former and Continuing Trading Services 6 22

7 3 Guidance on Statutory Trading Accounts Appendix 1 The Local Government in Scotland Act 23 repealed the legislation governing Compulsory Competitive Tendering and set out new regulations which required authorities to maintain and publish information on statutory trading accounts for significant trading operations. Significant trading operations must break even over a rolling three year cycle. Identification of Trading Operations The legislation stated that a service should be considered a trading operation when the following criteria were met: it is provided in a competitive environment and it is provided on a basis other than a straightforward recharge of cost. The Test of Significance Where a service meets the criteria in the section above, the next step is to consider whether it is significanf enough to fall under the requirements of the statutory regime. The test of significance is important as it determines which trading operations require to be maintained as Statutory Trading Accounts. Although CIPFA/LASAAC Guidance indicated the criteria to be used for determining significance, the actual determination of the criteria was left to individual local authorities. Dumfries & Galloway Council decided on the following tests of significance: turnover in excess of 2% of the Council s revenue budget budgeted surplus in excess of f5k and, external contract income in excess off 1k. Since 23/4 the Council has annually reviewed all services provided within the Council to assess which services could be considered as Significant Trading Operations. Until financial year 28/9, the Council maintained statutory trading accounts for the following services: catering & cleaning cleansing & grounds maintenance property maintenance roads maintenance. As a result of a reduction in size/turnover following the loss of the DGHP contract, the Property Maintenance Service was removed from the Statutory Trading Account regime in financial year 28/9. There has been a move in many local authorities to reduce the number of services maintained under the statutory trading accounts regime. In particular several authorities have recently ceased to maintain a Statutory Trading Account for Refuse Collection and Disposal activities. The results of this Council s review of trading accounts are outlined at Appendix 2. 23

8 Appendix 2 Summary of Classification of Former Trading Services and Projected Financial Performance The information reflected in this Appendix should be read alongside the financial summary provided at Appendix 3. It is important to recognise that the following analysis of projected financial performance does not address the impact of the introduction of Single Status which is currently being reviewed by DGFirst and will be the subject of a separate report. Statutow Trading Accounts Roads This Service generates significant external income through genuine trading based on external contracts at market rates. Size of turnover (f 18 Million +) and extent of external trading (f2 Million +) clearly meet the criteria for the maintenance of a Statutory Trading Account. This Service has consistently generated material surpluses over a number of years and, in the current financial year, a surplus of f388k is projected. Although performance will require to be carefully managed and monitored on an ongoing basis, it is considered reasonable to assume that trading surpluses will continue and a forecast surplus of f3k for 21 /11 is considered a prudent estimate. Vol u n taw Tradinzr Accounts Property Maintenance It is considered appropriate to maintain a trading account for this service as the level of activity is subject to material variation and it is therefore unrealistic to require this service to operate to a set budget. As neither the overall turnover nor the level of external income now exceed the tests of significance, there is no need for a statutory trading account to be maintained and the trading account approach is therefore being continued for management purposes. Property Maintenance has encountered significant trading difficulties in recent years returning deficits of f667k in 27/8 and f477k in 28/9. As reported to the Resources Committee, significant progress has been made in addressing these difficulties and a materially reduced deficit of f259k is now projected for the current financial year. It is confidently projected that further improvements in trading performance will be achieved and a forecast of a break-even position in 21/11 is considered realistic. As reflected at Appendix 3, it is considered prudent to build in a small allowance for delays in the achievement of these further savings and efficiencies. This approach is taken specifically for corporate budgeting purposes and does not remove the expectation/requirement on this trading account to break-even. 24

9 Architects and Engineering Services It is considered appropriate to maintain a trading account for these services where, as with Property Maintenance above, the level of activity is subject to material variation and it is therefore unrealistic to expect these services to operate to a set budget. These trading accounts should however be voluntary, rather than statutory, as neither the overall turnover nor the level of external income exceed the tests of significance. In recent years these services have been able to generate modest, but healthy, surpluses and a surplus of f28k is projected for the current financial year. It is anticipated that these surpluses will be achievable for future financial years although, for corporate budgeting purposes, assuming a break-even position is considered the most appropriate approach at this stage. 3 Vehicle Maintenance In addition to the level of variation in activity levels, there is also a need to retain a voluntary trading account approach for the Vehicle Maintenance Units as a mechanism is required to recharge costs across a range of, mainly internal, customers. A deficit of f83k was returned by this Service in 28/9 and the projection for the current financial year is for a deficit at a similar level of f82k. This service has recently undergone a detailed review of costs and charge out rates. Charge out rates will be appropriately updated to ensure full cost recovery and the avoidance of a deficit in the new financial year. Building Cleaning Similarly to Vehicle Maintenance, the maintenance of a trading account for Building Cleaning is voluntary and is being retained to recognise varying activity levels and to ensure that there is a mechanism to recharge costs to a range of, mainly internal, customers. This Service returned a deficit of f 97k in financial year 28/9 but it is anticipated that a surplus of f35k will be achieved in the current financial year. A report outlining further effciencies and savings within the Building Cleaning Service was recently considered by the Resources Committee. It is projected that these further measures will result in a surplus of at least f5k in the upcoming financial year. Catering Separated from Building Cleaning, the turnover of the Catering Unit is below the threshold requiring the preparation of statutory trading accounts. However, at this stage it is considered appropriate to maintain a voluntary trading account as around 49% of this Unit s income is external. The classification of this Unit, and the associated budgeting arrangements, will be further reviewed as part of the implementation of the Commissioning and Delivery framework and may be subject to further change. This Service is facing considerable difficulties in terms of trading performance and a deficit of f258k is projected for the current financial year due mainly to a significant reduction in school meal take up in secondary schools associated with the impact of the Nutritional Standards Act. This Service is currently subject to review and the results of this review will be reported to the March meeting of the Education Committee. Although a projected break-even position has been 25

10 shown at Appendix 3 against this Service for , it is considered appropriate, for corporate budgeting purposes, to retain a provision in respect of potential delays in addressing existing trading difficulties. Radio Maintenance Service This service is relatively small in terms of the test of significance and there is therefore no need to maintain a statutory trading account. However, this service does generate the significant majority of its income from external sources (f42k out of f54k) and a voluntary trading account approach is therefore considered appropriate. This service tends to outturn at around the break even level which is the current forecast for both 29/1 and the upcoming financial year. Traininn Unit Same explanation/issues as for Radio Maintenance Service above. To be Removed From Trading Account Regime Cleansing This Service has previously been grouped alongside the Grounds Maintenance Service for the purposes of Statutory Trading Accounts reporting. However, treated as a separate service, Cleansing does not meet the test of significance in terms of size of turnover and maintenance of a statutory trading accounts is no longer appropriate/necessary. The significant majority of income is generated from Council services (mainly DGFirst itself) and external income is relatively small (less than 15% of overall income) with charges to external customers based on a schedule of rates agreed annually by the Resources Committee. It is therefore considered that this external income should be treated as fees & charges within the overall budget rather than this service operating through a trading account. The Cleansing Service has returned material deficits of f668k in 2718 reducing to f49k in 28/9. A projected deficit of f477k for the current financial year has been reported to the Finance Sub Committee and addressed, on non-recurring basis, through the application of General Fund Balances. It is fully anticipated that the measures agreed as part of the Waste Strategy Review (and in particular the removal of the blue box scheme which is projected to save f 587k and the review of glass recyclate operations) will result in this Service generating a surplus which has allowed Members to reflect savings of f22k in the Council s 21 /11 agreed budget. Grounds Maintenance Same explanation as above for Cleansing in terms of removal from Statutory Trading Account regime and transfer to General Fund. The Grounds Maintenance Service has generated healthy surpluses of f225k in 27/8 and f272k in 28/9. A projected surplus of f21 k in the current year has been reported to the Finance Sub Committee and used to help offset the impact on Balances of the Cleansing deficit. It is anticipated that a surplus at around the f2k mark will again be generated within the General Fund in the upcoming financial year. 26

11 3 Supporting People This Service does not trade and was previously maintained as a trading account due to its link to the Homecare service. Supporting People will now be maintained as part of the Homecare Service which, since financial year 28/9, has been removed from trading accounts. Business Support, Admin & Depots These Units are maintained within DGFirst to provide support to the various trading and non-trading business units. These Units are operated on a full cost recharge basis and should not be maintained as trading accounts. These units will continue to break even through fully recovering their costs through recharging and the overall level of expenditure is budgeted and monitored within DGFirst. As with the Council s other support services, the budgets against which the expenditure of these activities will be monitored will be agreed by Members on an annual basis. An overall summary of the financial projections for former and continuing trading services is provided at Section 11 of the main report. 27

12 Projected Financial Performance of Former and Continuing Trading Services Appendix 3 Statutory Trading Accounts Roads Projected Projected Surplus/(Deficit) Surplus/(Deficit) 29/ fooos f s Voluntary Tradinn Accounts Architects Engineering Services Property Maintenance Vehicle Maintenance Building Cleaning Catering Training Unit Radio Maintenance Unit Provision for Delays in Savings/Efficiencies* Total Trading Accounts Total (Deficit)/Surplus O* O* 5 O* Services Transferred to General Fund Cleansing (&SWF) Agreed Savings Grounds Maintenance Supporting People Business SupporVAdmin & Depots/Fleet Management General Fund Total Explanations of projected trading results for 29/1 were reported to the Resources Committee at its meeting of 16 February 21. Comments on projected 21/11 financial performance are provided at Appendix 2 to this report. Section 1 1 of the main report provides an overview of the financial projections of former and continuing trading services for both the current and upcoming financial years. The projected combined 29/1 deficit against Property Maintenance, Vehicle Maintenance and Catering is f599k. Measures to address these deficits are already being progressed, particularly for Property Maintenance and Vehicle Maintenance, and projected break-even positions are shown for each of these Services for However, it is recognised that there may be delays in addressing existing deficits, mainly in respect of the Catering service, and a provision of f25k for delay in the achievement of savings/efficiencies is reflected in the table above. This is included specifically for corporate budgeting purposes and does not remove the expectationlrequirement on individual trading services to at least break-even. 28